Japan: Positive growth until the end of 2019?

For the eighth consecutive quarter – the longest period in 28 years! – growth was positive in Japan in the fourth quarter of 2017 (+0.4% year-on-year). It averaged 1.7% in 2017 and was driven by both domestic and foreign economic activity.

In February, the unemployment rate fell to just 2.5%. Also, because of unfavourable demographics, hiring difficulties, which were already acute (chart 1), began to push wages upwards. In February, they rose by 1.3% year-on-year. With employment up by 2.4% year-on-year, the wage bill is currently up by 3.7%, far greater than inflation (about 1.5%). This should keep consumption on the right track in the coming quarters.

Growth should also be driven by capital expenditure, which has been rising for several quarters. In addition to solid profits (chart 2), the production capacity insufficiency indicator (chart 3) rose again. In the latest Tankan survey, this was reflected in fiscal 2018 investment forecasts that were far more optimistic than those of previous years. Lastly, given the strength of global growth in 2018 – in both developed economies (3% in the US and 2.5% in the euro zone) and emerging ones, Japanese exports are likely to continue rising robustly.

All in all, growth is expected to be about 1.6% in 2018 and to remain in positive territory until the third quarter of 2019, when the new VAT rate hike (from 8% to 10%) is due to come into effect. Similar to what was seen in 2014, consumers and businesses are expected to move their spending forward to the first half of 2019.

Two risks are currently weighing on this scenario. First, the war of words between the United States and China could get worse and lead companies to postpone their investment and hiring plans. The resulting global slowdown would not spare growth in Japan. Second, the approval rating of the prime minister, Shinzo Abe, has fallen steeply in recent times, due in large measure, to the Moritomo scandal, and undermined his chances to win re-election as the head of his party – the LDP – next September. If Shinzo Abe fails to win re-election, the new party head (who would, de facto, be the new prime minister) could shift Japan’s economic and fiscal orientations.